MARKET WATCH: Crude price plumbs $70/bbl

Sam FletcherOGJ Senior Writer

HOUSTON, May 17 -- Crude prices continued to fall May 14, with the front-month futures contract closing below $72/bbl and likely to test $70/bbl, analysts said.

However, European equities rallied in early trading May 17 following last week’s sell-off after the euro dropped “to its lowest level in over 4 years,” said analysts in the Houston office of Raymond James & Associates Inc.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The US retail sales number released May 14 showed continued strength, with a gain of 0.4% for the month. The macro data for the US economy are still improving, but the current focus is on Europe, not the US. The indicators for the banking economy have, however, not yet improved: US banks are still sitting on cash, and the amount of commercial and industrial loans continue to drift lower.”

Jacob said, “The big story of the week was written by the euro. It started [last] week with a rebound on the news of European leaders coming up with ‘nuclear’ loan guarantees, but it ended the week lower and at the lowest weekly close since 2006 as the austerity measures that come with the rescue of Greece were being spelled out. Even in the credit crisis of end 2008 and early 2009, the euro was not as weak as it is currently. West Texas Intermediate is still priced $24/bbl over the dollar correlation of 2009 (that correlation was broken in December 2009). Given that [North Sea] Brent has moved from a discount to a premium to WTI, the Europeans with the rising dollar are not getting much of a price discount in the oil flat price correction.”

Natural gasNatural gas prices were rebounding in early trading after falling 0.5% on May 14.

However, Raymond James analysts said, “US gas supply is growing way faster than the market realizes. Current consensus calls for domestic gas supply growth this summer of less than 1 bcfd year-over-year. In contrast, we now believe that year-over-year gas supply growth will be closer to 4 bcfd this summer.” If one connects the dots, these massive supply trends become pretty obvious.”

The most recent US gas production trends reported by the Energy Information Administration (September 2009 through February 2010) “show gas supply has grown about 500 MMcfd each month since the September bottom,” said Raymond James analysts. By extrapolating that growth trend though the summer, they said, “Gas supply figures would reach a whopping 6 bcfd by September.”

Raymond James said, “The scariest thing about these trends in recent months is that they were driven by a relatively low (sub 700) gas rig count, and given that the gas rig count today is closer to 950 active rigs, intuition would suggest that this gas supply growth rate might actually accelerate though the summer. This is supported by recent gas storage data, and if that acceleration continues, it seems highly unlikely that the late summer 2010 gas futures will hold up in the mid to high $4/Mcf range.”

Energy pricesThe June contract for benchmark US light, sweet crudes traded May 14 at an intraday low of $70.83/bbl before closing at $71.61/bbl, down $2.79 for the day on the New York Mercantile Exchange. The July contract dropped $3.56 to $75.43/bbl. On the US spot market, WTI at Cushing, Okla., was down $2.79 to $71.61/bbl. Heating oil for June delivery lost 7.13¢ to $2.06/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 6.43¢ to $2.13/gal.

The June natural gas contract decreased 2.7¢ to $4.31/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was unchanged at $4.26/MMbtu.

In London, the June IPE contract for North Sea Brent crude was down $2.93 to $77.18/bbl. Gas oil for June dropped $20.50 to $662.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes lost $2.48 to $75.95/bbl. So far this year, OPEC’s basket price has averaged $77.42/bbl.